As reported last week, we added some companies from our watch list. The expectation is that these buys will eventually be offset with sales of companies which we don’t feel offer the upside potential.
The market did not start the week strong. It headed south and tested the 50 day technical line again; support did hold. We see a decisive moment approaching for the market. Caution is warranted, especially given the recent weak dollar trend. The dollar broke 200 day support on Tuesday and continued lower for the rest of the week. Higher interest rates, a lower currency and a spike in volatility. No, I am not speaking of an emerging market country. This is exactly what we’ve been seeing in the US.
AmerisourceBergen is up 50% in the last year and recent price strength has begun to tire. AmerisourceBergen’s stock has benefited from some strategic business execution and a favorable industry. But there are also some financial factors benefiting the stock which will not last and are not long term investment strategies. ABC’s days payable ratio has been rising. Here, ABC garners favorable working capital financing from other supply chain companies. This is a tribute to their industry strength and benefits equity holders, but it will not benefit the company forever. Second, financial leverage has risen to 7x in this interest rate environment. Equity holders receive more return, but there is more risk, thank you Ben Bernanke. Finally, investors are paying 5.5x book value for the stock where they have traditionally paid only 2x, again thank you BSB. Revenues are expected to continue growing, but this is as much about leverage in an ultra low interest rate environment. The valuation of a solid company with stable revenue becomes very prone should interest rates begin a steady march toward normalized levels. We feel events such as the recent Walgreens’ deal are fully priced at today’s level. Sell ABC and book the 76% gain over the 3 year holding period.
We also rebalanced Altria back to target weight. Again, a common theme, we are selling highly leveraged companies. The leverage isn’t necessarily in the form of debt, but in the form of valuation. Altria’s financial leverage has risen from 3x to 10x and their equity is trading at 20x book value. Yes, the revenues are more stable than most company’s, but normalization of interest rates and/or any revenue hiccup will hurt this company. The company is up over 50% in the last 2 years and there are some initial indications of “topiness.”
As always, please feel free to contact me with any questions or concerns.
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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@alhambrapartners.com
Disclaimer: The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Alhambra Investment Partners LLC, do not constitute investment advice offered by Alhambra, are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and are not warranted to be correct, complete or accurate. Except as otherwise required by law, Alhambra shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.
